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«International Financial Reporting Standard® Clarification of Acceptable Methods of Depreciation and Amortisation Amendments to IAS 16 and IAS 38 ...»

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May 2014

International Financial Reporting Standard®

Clarification of Acceptable Methods

of Depreciation and Amortisation

Amendments to IAS 16 and IAS 38

Clarification of Acceptable Methods of

Depreciation and Amortisation

(Amendments to IAS 16 and IAS 38)

Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and

IAS 38) is published by the International Accounting Standards Board (IASB).

Disclaimer: the IASB, the IFRS Foundation, the authors and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise.

International Financial Reporting Standards (including International Accounting Standards and SIC and IFRIC Interpretations), Exposure Drafts and other IASB and/or IFRS Foundation publications are copyright of the IFRS Foundation.

Copyright © 2014 IFRS Foundation® ISBN: 978-1-909704-37-4 All rights reserved. No part of this publication may be translated, reprinted, reproduced or used in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the IFRS Foundation.

The approved text of International Financial Reporting Standards and other IASB publications is that published by the IASB in the English language. Copies may be obtained

from the IFRS Foundation. Please address publications and copyright matters to:

IFRS Foundation Publications Department 30 Cannon Street, London EC4M 6XH, United Kingdom Tel: +44 (0)20 7332 2730 Fax: +44 (0)20 7332 2749 Email: publications@ifrs.org Web: www.ifrs.org The IFRS Foundation logo/the IASB logo/the IFRS for SMEs logo/‘Hexagon Device’, ‘IFRS Foundation’, ‘eIFRS’, ‘IASB’, ‘IFRS for SMEs’, ‘IAS’, ‘IASs’, ‘IFRIC’, ‘IFRS’, ‘IFRSs’, ‘SIC’, ‘International Accounting Standards’ and ‘International Financial Reporting Standards’ are Trade Marks of the IFRS Foundation.

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CLARIFICATION ACCEPTABLE METHODS DEPRECIATION AMORTISATION

OF OF AND

CONTENTS

from page

APPROVAL BY THE BOARD OF CLARIFICATION OF ACCEPTABLE METHODS

OF DEPRECIATION AND AMORTISATION (AMENDMENTS TO IAS 16 AND

IAS 38) ISSUED IN MAY 2014 4 AMENDMENTS TO IAS

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Approval by the Board of Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) issued in May 2014 Clarification of Acceptable Methods of Depreciation and Amortisation was approved for issue by fifteen of the sixteen members of the International Accounting Standards Board. Ms Tokar dissented. Her dissenting opinion is set out after the Basis for Conclusions.

Hans Hoogervorst Chairman Ian Mackintosh Vice-Chairman Stephen Cooper Philippe Danjou Martin Edelmann Jan Engström Patrick Finnegan Amaro Luiz de Oliveira Gomes Gary Kabureck Suzanne Lloyd Patricia McConnell Takatsugu Ochi Darrel Scott Chungwoo Suh Mary Tokar Wei-Guo Zhang

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Amendments to IAS 16 Property, Plant and Equipment Paragraph 56 is amended and paragraphs 62A and 81I are added. Paragraphs 60–62 are not amended but are included here for ease of reference. New text is underlined.

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56 The future economic benefits embodied in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains idle, often result in the diminution of the economic benefits that might have been obtained from the asset. Consequently, all the following factors are considered

in determining the useful life of an asset:

–  –  –

… Depreciation method 60 The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

61 The depreciation method applied to an asset shall be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8.

62 A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method. Straight-line depreciation results in a constant charge over the useful life if the asset’s residual value does not change. The diminishing balance method results in a decreasing charge over the useful life.





The units of production method results in a charge based on the expected use or output. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.

–  –  –

That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

62A A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. The revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits of the asset. For example, revenue is affected by other inputs and processes, selling activities and changes in sales volumes and prices. The price component of revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed.

...

Effective date … Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to 81I IAS 16 and IAS 38), issued in May 2014, amended paragraph 56 and added paragraph 62A. An entity shall apply those amendments prospectively for annual periods beginning on or after 1 January 2016. Earlier application is permitted. If an entity applies those amendments for an earlier period it shall disclose that fact.

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Amendments to the Basis for Conclusions on IAS 16 Property, Plant and Equipment Paragraphs BC33A–BC33G and their related heading are added. New text is underlined.

Depreciation: depreciation method BC33A The IASB decided to amend IAS 16 to address the concerns regarding the use of a revenue-based method for depreciating an asset. The IASB’s decision was in response to a request to clarify the meaning of the term ‘consumption of the expected future economic benefits embodied in the asset’ when determining the appropriate amortisation method for intangible assets of service concession arrangements (SCA) that are within the scope of IFRIC 12 Service Concession Arrangements. The issue raised is related to the application of paragraphs 97–98 of IAS 38 Intangible Assets although the IASB decided to address the issue broadly, rather than limit it only to intangible assets arising in an SCA.

BC33B The IASB observed that a revenue-based depreciation method is one that allocates an asset’s depreciable amount based on revenues generated in an accounting period as a proportion of the total revenues expected to be generated over the asset’s useful economic life. The total revenue amount is affected by the interaction between units (ie quantity) and price and takes into account any expected changes in price.

BC33C The IASB observed that paragraph 60 of IAS 16 states that the depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. The IASB noted that even though revenue could sometimes be considered to be a measurement of the output generated by the asset, revenue does not, as a matter of principle, reflect the way in which an item of property, plant and equipment is used or consumed. The IASB observed that the price component of revenue may be affected by inflation and noted that inflation has no bearing upon the way in which an asset is consumed.

BC33D On the basis of the guidance in IAS 16, the IASB proposed to clarify in the Exposure Draft Clarification of Acceptable Methods of Depreciation and Amortisation (Proposed amendments to IAS 16 and IAS 38) (the ‘ED’) that a method of depreciation that is based on revenue generated from an activity that includes the use of an asset is not appropriate, because it reflects a pattern of economic benefits being generated from operating the business (of which the asset is part) rather than the economic benefits being consumed through the use of the asset.

BC33E During its redeliberations of the ED the IASB decided to reaffirm its conclusion that the use of a revenue-based method is not appropriate, because the principle in paragraph 60 of IAS 16 is that the “depreciation method shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity”. A method that is based on revenue generated from an activity that includes the use of an asset would be, in contrast, a method based 7 IFRS Foundation AMENDMENTS TO IAS 16 IAS 38—MAY 2014 AND on the generation of future economic benefits from the use of the asset. As a result of the feedback received on the ED, the IASB also decided not to retain the comments that it had included in the Basis for Conclusions on the ED on the limited circumstances in which a revenue-based method gives the same result as a units of production method. Many respondents to the ED found these comments contradictory to the guidance proposed in the Standard.

BC33F In the ED the IASB proposed to provide guidance to clarify the role of obsolescence in the application of the diminishing balance method. In response to the comments received about the proposed guidance the IASB decided to change the focus of this guidance. The IASB decided to explain that expected future reductions in the selling price of an item could indicate the expectation of technical or commercial obsolescence of the asset, which, in turn, might reflect a reduction of the future economic benefits embodied in the asset. The IASB noted that the expectation of technical or commercial obsolescence is relevant for estimating both the pattern of consumption of future economic benefits and the useful life of an asset. The IASB noted that the diminishing balance method is an accepted depreciation methodology in paragraph 62 of IAS 16, which is capable of reflecting an accelerated consumption of the future economic benefits embodied in the asset.

BC33G Some respondents to the ED suggested that the IASB should define the notion of ‘consumption of economic benefits’ and provide guidance in this respect.

During its redeliberations the IASB decided against doing so, noting that explaining the notion of consumption of economic benefits would require a broader project.

–  –  –

Amendments to IAS 38 Intangible Assets Paragraph 92 is amended. In paragraph 98, the phrase ‘unit of production method’ has been amended to ‘units of production method’. Paragraphs 98A–98C and 130J are added. Paragraph 97 is not amended but is included here for ease of reference.

Deleted text is struck through and new text is underlined.

Useful life … 92 Given the history of rapid changes in technology, computer software and many other intangible assets are susceptible to technological obsolescence. Therefore, it is likely will often be the case that their useful life is short. Expected future reductions in the selling price of an item that was produced using an intangible asset could indicate the expectation of technological or commercial obsolescence of the asset, which, in turn, might reflect a reduction of the future economic benefits embodied in the asset.

… Amortisation period and amortisation method 97 The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortisation shall cease at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised. The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. The amortisation charge for each period shall be recognised in profit or loss unless this or another Standard permits or requires it to be included in the carrying amount of another asset.

98 A variety of amortisation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method. The method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied in the asset and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of those future economic benefits.

There is a rebuttable presumption that an amortisation method that is based on 98A the revenue generated by an activity that includes the use of an intangible asset is inappropriate. The revenue generated by an activity that includes the use of

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